Capital gains “myth” of 15% and what a 1031 exchange can save you
Capital Gains 15% Myth
"Just Pay the Capital Gains - it’s Only 15%"
What terrible and misleading advice! I have CPAs, attorneys, and other ‘friends’ recommending to my clients to just pay the 15%. True, the Federal Capital Gains rate went to 15% on 05/05/03, however the rate isn’t as cut and dried as it appears. The gain on APPRECIATION dropped to 15%, but the gain on DEPRECIATION is at 25%.
In addition, most states will apply a tax typically ranging from 5% to 11%. As your income rises and your profits on the sale are added to your adjusted gross income, the Federal Alternative Minimum Tax is likely to factor in as well.
Your ‘15%’ is much more likely to be closer to 40% by the time the entire tax burden is factored in.
This example will illustrate more clearly:
| Purchase Price of Investment | $75,000 |
| Sale Price of Investment | $150,000 |
| Adjusted Basis | $50,000 |
| Capital Gain | $100,000 |
| Tax on Appreciation 15% | $15,000 |
| Tax on Depreciation 25% | $25,000 |
| Tax Burden 40% | $40,000 |
This doesn’t even factor in State Tax, but it does illustrate that the burden is more than 15%. What if you didn’t take depreciation during the life of the investment? Too bad, you should have! The IRS will still make you pay the recapture regardless if you took it or not.
Here’s the official IRS publication in PDF form for Depreciation.
If you have any questions about 1031 exchanges or buying or selling Lake of the Ozarks real estate, you can always contact John Garrett at 573-302-2320 or e-mail me for a fast response.
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